Uncertain. If there’s one word that best describes the current outlook for international law firms, that is surely it.
Ever since the financial crisis, Big Law has had to get used to volatile market conditions. But the United Kingdom’s shocking decision to leave the European Union and Donald Trump’s equally unexpected victory in the U.S. presidential election have left international law firms facing significant uncertainty in the world’s two largest legal markets.
Almost all of the world’s 100-largest law firms by revenue are based in either the United States or the U.K., according to The American Lawyer’s latest Global 100 survey. Recession aside, these firms have in the past been able to rely on a high degree of stability in their home markets. No longer.
The managing partner of one global top 20 firm, speaking on the condition of anonymity, says that Brexit and Trump have combined to create a “perfect storm of instability.”
Despite this, the overwhelming majority of the more than 20 international law firm partners interviewed for this feature say that they are relatively optimistic about the year ahead. The 2008 recession once again highlighted the resilience of the legal industry, and there’s an unspoken truth that change, even disruptive change, is generally good news for lawyers. The breadth of practices and geographies typical of most international firms allows them to make money at any point of the market cycle.
“It’s not a perfect environment by any means—I’d rather have a bull market—but things are actually still pretty busy,” says Allen & Overy managing partner Andrew Ballheimer. “There’s obviously great volatility out there, but as a business in 44 places around the world, we’re quite nicely hedged.”
Firms are anticipating patchiness in core markets and a softening of transactional activity—particularly M&A—as companies and investors attempt to make sense of the new world order. But this is likely to be offset by high levels of demand for regulatory, restructuring and other advisory work related to changes in Europe and the U.S., and a continued growth in areas such as cross-border investigations, compliance and disputes.
Freshfields Bruckhaus Deringer senior partner Edward Braham says that the financial crisis has helped prepare firms for how to react to “profoundly new” market conditions. “You have to be able to quickly adapt to the changing needs of clients,” he says. “During the financial crisis, we had to bring together practices that hadn’t previously worked together, such as restructuring and financial services regulation, because the issues that were emerging didn’t previously exist. You almost have to shapeshift.”
Trying to predict future global market conditions is enormously difficult in the best of times. Trying to do so in the midst of one of the most significant political and economic shifts for generations would make even Warren Buffett sweat. The simple fact is that nobody really knows what is going to happen over the next 12 weeks, let alone the next 12 months.
With that major caveat, we asked partners at some of the world’s top international law firms to assess the likely outlook for 2017 in three key regions: the U.K. and Europe; Asia; and Latin America. Here is what they said.
Outlook: Generally positive
Hot: China (for outbound work), India (if the market liberalizes)
Not: China (for inbound work)
Compared to Latin America and Europe, Asia is somewhat detached from the tremors of Trump and Brexit. “Asia operates to its own dynamics,” says Linklaters’ Shropshire.
Asia is seeing a growth in intraregional investment—particularly in the Association of Southeast Asian Nations (ASEAN). The group of 10 states, which includes Indonesia, Malaysia, Philippines, Singapore and Thailand, is described by JPMorgan Chase & Co. as “fast becoming a major economic force and a driver of global growth.” ASEAN countries attract almost a quarter of all outbound investment from Europe and are collectively the largest Asian destination for U.S. investment. The bloc is predicted to post average annual GDP growth of more than 5 percent through 2019 and to become the world’s fourth-largest market by 2030, behind only the U.S., the EU and China.
There are broader ramifications in Asia over the future of the Trans-Pacific Partnership, a free trade agreement among 12 Pacific Rim countries that includes the U.S. but, notably, does not include China. Trump has promised that America will withdraw from the pact as soon as he takes office on Jan. 20. Some expect that China will try to step in and fill the vacuum.
But Baker & McKenzie global executive committee member Gary Seib, who is based in the firm’s Hong Kong office, says that he doesn’t believe a failure to enact the TPP would significantly damage the region. “If there was a view [among clients] that trade flows would be severely restricted, that could have an impact on commercial activity and therefore legal work,” he says. “But we’re likely to be seeing the region in growth mode for some time yet.”
China: After years of runaway growth in China, the world’s second-largest economy has slowed over the past 18 months. Inbound investment has dropped, and capital markets activity has subsided.
That said, the Chinese economy is still growing at more than 6 percent, which far outstrips almost any other developed country. “China has slowed down, but the economy still puts on the equivalent of the GDP of Switzerland every year,” says Seib.
And while inbound work is down—and has become more competitive on pricing—lawyers are eagerly anticipating a continued increase in outbound investment from China in 2017. At press time in mid-November, outbound Chinese M&A was set to hit a record $500 billion in 2016, according to Mergermarket data. Moreover, the country was set to replace the U.S. as the top acquirer of foreign companies in 2016, a position that America has held for the past decade. The deals are becoming increasingly large and complex, too, with state-owned China National Chemical Corp. recently acquiring Swiss pesticide and seed producer Syngenta AG for $43 billion—the biggest-ever overseas takeover by a Chinese company. China’s “One Belt, One Road” initiative—often referred to as the new Silk Road, encouraging the promotion of regional and cross-continental connectivity between China and Eurasia—is also likely to generate substantial work for lawyers across Asia and Europe, with $1 trillion in investments already announced.
International law firms are also expected to continue to form closer partnerships with Chinese practices in 2017 by making use of rule changes in both China and Hong Kong. Foreign firms have historically been prohibited from practicing Chinese law, but Hong Kong’s Closer Economic Partnership Arrangement (CEPA) and the Shanghai Free Trade Zone (FTZ) both allow joint operations between domestic and international practices. Stephenson Harwood and Clyde & Co are among the firms to have set up joint ventures under CEPA, while Baker & McKenzie, Hogan Lovells and London-based shipping specialist Holman Fenwick Willan have formed alliances via the Shanghai FTZ. Hogan Lovells regional managing partner Patrick Sherrington says that the ability to partner with domestic practices has “dramatically changed the landscape” for international law firms in China.India: There is also renewed hope that international law firms may finally be allowed to establish practices in India. The liberalization of the Indian legal market has been on the agenda for decades, but despite seemingly endless debate and considerable lobbying efforts, it has so far come to naught.
International firms desperate to tap into the world’s fastest-growing major economy were given renewed hope last summer, when the Indian government issued draft regulations that proposed allowing them to open offices in the country, handle foreign law transactional work and hire local lawyers. But the process hit another snag when the Society of Indian Law Firms, a powerful representative body of the country’s 100 leading firms, withdrew its support for liberalization.
Despite this setback, Baker’s Seib says that there is a “strong sense that progress is being made.” He and other lawyers believe that recent moves represent more than yet another false dawn, and that the market will ultimately open up within the next few years. Most agree, however, that this is unlikely to happen in 2017.
Any development would lead to a rush of global law firms opening offices in the country. “We’d be one of the first, if not the first, to open up,” says Baker & McKenzie’s new global chair, Paul Rawlinson.
Foreign investment into India increased almost 30 percent in the year to March 2016, to $40 billion, while the country has been going through a sustained boom in capital markets, with IPO activity doubling in 2016 and expected to continue to rise over the next 12 months. India’s GDP is forecast to grow 7.6 percent in 2017, according to the International Monetary Fund.
Outlook: Generally positive
Latin America has long been an attractive but
challenging market for international law firms. Thanks to widespread political and economic instability, the region has repeatedly veered between breakneck growth and crippling recession.
To make matters worse—or less predictable, at least—Latin America has now had an extra degree of uncertainty imposed upon it following the U.S. presidential elections. America is a key source of trade and investment for many countries in the region, although there is also considerable—and growing—investment from Europe and China. Much will depend on the stance that Trump ultimately takes.
Lawyers are nevertheless anticipating high levels of demand across Latin America over the next 12 months, with a particular boom in projects work. “The region as a whole is in desperate need of investment in infrastructure,” says Baker & McKenzie’s regional chair, Claudia Prado. “It will drive a lot of business into the region in 2017.”
Argentina: Argentina may be at the foot of the continent, but lawyers say that it is top of the pile in terms of legal services activity. The country had been languishing ever since its disastrous sovereign default in 2001. But the election of a new president in 2015 has led to a significant improvement in Argentina’s prospects—and those of lawyers practicing in the country.
The new administration has sought to stimulate investment by lifting restrictions in foreign exchange markets, reducing export tariffs and vowing to tackle the country’s sky-high rate of inflation, which is currently around 40 percent. It also created a new public-private partnership bill to facilitate infrastructure investment: The government plans to spend as much as $26 billion on transport and other projects over the next four years.
The setting of ambitious renewable energy targets is expected to result in more than $3 billion of direct investment over the next 12 months, with almost 60 solar projects submitted during the country’s first tender round in 2016. Lawyers are also anticipating a significant uptick in work across the energy and natural resources sector. The country has huge untapped reserves of shale gas—second only to China’s, according to U.S. Energy Information Administration data.
Most importantly of all, the new government was in early 2016 able to finally settle a 15-year dispute with holdout creditors of its defaulted national debt, allowing the country to return to international debt markets. Its $16.5 billion debt issue in April 2016 was heavily oversubscribed, further raising investor confidence.
“Things are really improving with the new administration—we’re seeing a lot more activity, and the outlook is very positive,” says Allen & Overy project finance partner Bruno Soares, who heads the Magic Circle firm’s São Paulo office and works across the region.
Brazil: Nowhere is the unpredictability of Latin America better illustrated than Brazil. In November 2009, The Economist ran a cover image showing a rocket-propelled Christ the Redeemer taking to the skies above Rio de Janeiro with the headline “Brazil Takes Off.” In September 2013, the magazine’s cover displayed a slightly altered version of the same image, this time showing the famous statue crashing back to earth with the headline “Has Brazil Blown It?”
The market has for years been mired in a deep recession following one of the country’s worst political crises in decades. State-owned oil giant Petróleo Brasileiro S.A. has been subject to a massive corruption probe by U.S. authorities, while Brazil’s president was impeached in August for manipulating the federal budget to conceal the country’s mounting economic problems. The value of Brazil’s currency has been cut almost in half over the past five years. Its GDP is forecast to have fallen by more than 3 percent in 2016.
The country’s outlook has markedly improved thanks to some decisive action by the new administration, however. Brazil still faces challenges surrounding significant levels of unemployment, a sizable fiscal deficit and high inflation, but the country is now expected to return to growth in 2017, with the government predicting a GDP boost of 1.6 percent. The Brazilian real was the world’s best-performing currency in 2016, having gained almost 25 percent against the U.S. dollar, although its value tumbled 9 percent in the days after Trump’s election.
Lawyers expect rising interest among private equity and other international investors to generate significant activity in the country in 2017, particularly surrounding the government’s new infrastructure plan. Tenders have already been issued for more than 30 port terminals, worth over $3 billion, while heavy investment is also planned in roads and railways. White & Case’s Latin America head Don Baker says that the firm is seeing “heightened interest” from investors in the energy and infrastructure sectors.
There are even signs that Brazil’s capital markets may finally be reopening, with medical diagnostics company Alliar Medicos a Frente recently carrying out the country’s first initial public offering in 14 months. “If you compare the situation six months ago to now, it’s like night and day,” says A&O’s Soares. “There is a lot happening.”
Peru, Chile and Paraguay: Elsewhere, Peru’s new president has outlined plans for substantial investment in infrastructure, and has introduced tax breaks to boost private sector business.
Growth in Chile’s more developed and stable economy has slowed, but lawyers still expect to see strong client demand in the energy and mining sectors. Activity will likely focus on renewable energy. The government’s goal is to have renewable sources provide 20 percent of the country’s energy by 2025—and 70 percent by 2050. Spanish renewables company Acciona S.A. has invested $343 million in a Chilean solar farm—one of several solar projects under construction. There are also hopes that Paraguay may finally achieve investment grade status in 2017, which would help drive foreign investment. Like the rest of the region, the country is investing heavily in infrastructure Spanish construction company Sacyr Vallehermoso S.A. and Portugal’s Mota-Engil both recently won contracts for major road projects that will be built this year.
Colombia, Venezuela and Mexico: At the other end of the spectrum, the Colombian government’s attempts to end a 52-year war with Marxist guerrillas were dashed in October after the public narrowly voted to reject a peace deal. Lawyers say that the unexpected result has cooled investor interest in the country, although investment in infrastructure—particularly roads—is likely to drive activity.
The outlook in Venezuela is even less rosy, with the country teetering on the edge of an economic meltdown. Multinational corporations including U.S. food company General Mills Inc. and oil producer Harvest Natural Resources Inc. have been selling their operations in the country at heavy discounts, which has created some work for law firms. But lawyers say the market for legal services is shrinking rapidly. “It’s a big question mark,” says Soares.
An even bigger question mark hangs over Mexico. The country’s economy is heavily reliant on trade with the U.S.—Mexico exported almost $300 billion of goods to its northern neighbor in 2015. But the U.S. election has put the future of U.S.-Mexico trade in jeopardy. Trump promised during his campaign to scrap the North American Free Trade Agreement and to erect barriers—both figurative and literal—between the two countries. It remains unclear whether he will take a more moderate approach once he takes office, but investors are clearly spooked. “If Trump really does what he claimed in his campaign, this could be very problematic for Mexico,” Baker’s Prado says.
Hot: France and Germany (maybe)
Not: United Kingdom
No major global market is currently more
plagued by uncertainty than Europe. The U.K.’s decision to leave the EU has cast a long shadow over the region, with the outcome and even the direction of travel unclear. It isn’t even certain that Brexit will happen at all, with the government’s plans recently thrown into disarray by a historic court ruling that the process must be subject to a parliamentary vote.For law firms, the picture in Europe is equally vague. After an initial frenzy of advisory work for clients in the aftermath of the Brexit vote, a drop in business and investor confidence has led to a reduction in transactional activity. Deal lawyers started to see an uptick toward the end of the summer as clients became more comfortable with Brexit-related risk, only for the market to be knocked again by the U.K. government’s indication that it will seek to leave the European single market as part of a so-called hard Brexit.
“Volatility is the enemy of dealmaking,” says Simon Jay, an M&A partner in the London office of Cleary Gottlieb Steen & Hamilton. “Things had been moving back toward more normal activity, but it doesn’t take much to get everyone scurrying back into their burrows.”
Jay says that it is “extremely difficult” to predict the M&A outlook for 2017. Lawyers say that inward investment into the U.K. might be expected to slow because of Brexit uncertainty, but the weakening of the British pound, which has lost over 16 percent against the dollar since the EU referendum, may drive deals by presenting opportunistic buyers with relatively cheap assets. “It’s not black and white,” A&O’s Ballheimer says.
It is likely that M&A activity will increase once formal Brexit negotiations begin and the situation surrounding the country’s withdrawal starts to become clearer, while lawyers also predict a surge in private equity work as soon as there is a greater certainty around pricing. But the U.K. M&A market is expected to remain depressed throughout 2017.
Scott Simpson, co-head of the global transactions practice at Skadden, Arps, Slate, Meagher & Flom, says that Brexit could lead to an increase in outbound M&A activity from the region, however, as corporations seek to increase their exposure in the U.S. and other less volatile markets. “We’re in a period where people are just trying to recalibrate,” says Simpson. “The uncertainty in Europe isn’t going to go away for a while, whereas the U.S. is likely to be a growth engine.”
Any restrictions—perceived or actual—surrounding Chinese investment in the U.S. under Trump could also result in the country further increasing its activities in Europe. Chinese investment in Europe has rocketed from just $6 billion in 2010 to over $82 billion in the first 11 months of 2016, according to Mergermarket Group data and a report by Baker & McKenzie and U.S. consulting firm Rhodium Group.
The United Kingdom: Despite Brexit, lawyers expect London to remain a center for business and finance in 2017 and beyond. London was a major international hub long before the EU was founded in 1993. The U.K. capital is one of the world’s most important forums for international dispute resolution, and English law is used on transactions everywhere from Russia to Singapore.
There are fears that banks and other companies could shift some business from London to other European cities as a result of the Brexit vote, however. Financial institutions are particularly concerned about a potential loss of access to the EU single market, which many rely on to run European trading operations out of London. Russia’s VTB Bank has already announced that it will relocate its European headquarters from London because of Brexit, while a private report from accounting giant EY states that a loss of single market access could cost London 83,000 jobs—including 18,000 in legal and accounting services.
This has led to huge demand for U.K. financial services regulatory advice, with lawyers expecting to see continued growth in that area in 2017 as the Brexit process unfolds. It could also generate significant transactional work as banks and corporations restructure and rebalance their operations. “It isn’t just a case of sending a few people overseas—it involves de-merging parts of significant financial institutions,” says Bob Penn, a financial services regulation partner in Cleary Gottlieb’s London office. “Those jobs are pretty intensive and take quite a lot of time—and money.”
A comprehensive European tax reform package proposed by the EU in October is also set to keep lawyers busy in 2017. And antitrust practices are anticipating additonal work from companies that will have to make separate U.K. and EU filings post-Brexit. France and Germany: France and Germany are considered the two most likely beneficiaries of fallout from London. Paris and Frankfurt are already important financial centers, and the latter is also home to the European Central Bank, the eurozone’s Federal Reserve. Many international law firms already have offices in both cities and may choose to expand these bases in 2017.
France and Germany have issues of their own, however. Both countries will hold general elections this year, which will slow business activity—and demand for legal advice. Linklaters European managing partner Claudia Parzani says that the elections add to the already “significant uncertainty” across Europe, but again sees longer-term opportunities for law firms. “Clients increasingly turn to us for advice and guidance on how a changing political landscape will affect their business,” she says.
There is even some suggestion that Trump’s apparently cordial relations with Russian president Vladimir Putin could see Russia return from the Big Law wilderness. The country spent much of the late 1990s and early 2000s as one of the world’s hottest legal markets, with international firms investing heavily in the country in order to feast on the glut of big-ticket IPO and M&A deals. But Russia’s economy—and its legal market—have been severely affected by crippling economic sanctions and the continued slump in global oil prices. Most top U.S. and U.K. firms have radically scaled back in the country by relocating partners to other offices and implementing local hiring freezes and layoffs. Depending on Trump’s approach and the possible relaxing of sanctions, it is possible that some of these international law firm outposts could start to be rebuilt in 2017. “There is going to be pent-up demand from a market that has essentially been shut off for years,” says Linklaters corporate partner Tom Shropshire.
Overall, European lawyers expect market conditions in 2017 to be muted, rather than apocalyptic.
Additional Asia reporting by Anna Zhang.